Unemployment-Inflation Trade-Offs

The question essentially asks us to compare a monetarist unemployment policy, in which adjustments in the interest rate affect the rate of employment, to a more active role of legislative properties in handling economic externalities. Is controlling inflation more important than staving off unemployment? Do we buy into the idea of the Phillips curve trade-off or the non-accelerating inflation rate of unemployment, or in other words, do we trade off inflation for unemployment, or in the long run does it even matter?

We could start this off prefaced with a little bit of history. As most know, the big result of the Great Depression economically was the rise of Keynesian economics. Fundamental to this system of the idea that if we work to lower unemployment rates, we face an inflationary trend. Milton Friedman in the late 60's advanced an idea that posited there was no long-run trade-off between the two. He argued we should keep inflation in check, because unemployment would naturally gravitate toward NAIRU. The collapse of the Bretton Woods system and the resulting policies of Volcker in the United States and Thatcher in Great Britain essentially marked the death of institutionalized Keynesian policy and the rise of Friedman's Chicago School of economic thought. But as is pointed out in Martin Wolf's analysis of the situation, rather than Keynes falling into obscurity and Friedman reigning supreme, we see "a world of fiat money has supplied modest inflation and supported stable growth." Though we now see this system that has existed since Bretton Woods's collapse coming under question once more, I still find the current monetary policy a suitable means of ensuring long-run stability versus storing wealth in a commodity bubble.

So yeah, you're probably doing pretty well if you're able to gravitate toward full employment. I buy into the idea that in the long run, we gravitate toward full employment. But the vast majority of the time, we aren't there and we're in a recessionary phase. So we could say we're wealthy, but it's all subjective.